Pricing, Efficiency and Fairness in a DG World

Sponsored and written by Melissa Sherrod, VP, Regulatory Policy & Strategy – ComEd and Ross Hemphill, VP Energy Acquisition – ComEd  

Melissa Sherrod

Melissa Sherrod

If you haven’t read it already, we direct your attention to the Wall Street Journal article by Liam Denning, “Lights Flicker for Utilities” (WSJ Dec 22, 2013) which concisely articulates the essence of the issues surrounding distributed generation and the effects it may have on the electric utility industry. The article correctly points out that rooftop solar may be the ultimate culprit in what could be devastating financial implications for the industry partly because of decreasing costs of the solar technology, but primarily because of subsidies that provide false price signals to customers choosing between grid-provided power and self-generation.

Ross Hemphill

Ross Hemphill

One such subsidy is between customers that install technologies like rooftop solar and those who do not participate. Subsidization typically occurs in situations where the rates for delivery are set with a relatively high volumetric charge – even though the cost of delivery is fixed, i.e. the cost of delivery service does not vary with usage. As the Denning WSJ article describes, “As more people switch to solar, utilities sell less electricity to those customers … [and] must spread their high fixed costs for things like repairing the grid over fewer kilowatt-hours, making solar power even more competitive and pushing more people to adopt it in a vicious circle.” The spreading of fixed cost over fewer kWh is the subsidy that is occurring from non-participants to participants, which is inequitable and unfair, as it results in customers unable or unwilling to purchase solar panels paying for the fixed costs incurred by those who can.

Effectively designing delivery rates is a solution to this dilemma, which may require the reevaluation of regulatory policy for rate design. Unbundled electricity pricing should be designed correctly – to accurately reflect the cost structure of the services provided. The most significant step that can be taken to bring rate design into line with cost causation is to properly align the fixed and variable price signals sent by delivery rates with the fixed and variable costs of providing delivery services. Most of the cost of providing delivery service is fixed; therefore, most of the rate charged for delivery service should be fixed. To charge less than this provides a false pricing signal to the customer. It conveys that they are avoiding certain costs of delivery by reducing consumption, when they really aren’t. The cost is still there; and, it will ultimately be recovered from other customers, which results in the subsidy.

Most opposition to setting fixed charges consistent with the fixed cost of service focus on two primary areas of concern: (1) reduction of the volumetric charge may reduce incentives to conserve energy; and, (2) higher fixed charges will be burdensome on lower usage and lower income customers.

In response to the first concern, energy efficiency opportunities will exist even with more efficient rate design. We are suggesting a higher fixed charge for delivery, and in an unbundled electric rate, delivery is a fraction of the total bill paid by customers. The remainder of the rate structure has ample energy efficiency incentive for the customer.

The response to the second concern circles back to the issue of distributed generation. An inefficient price signal (like charging volumetric rates to recover fixed costs) leads those willing and able to purchase an alternative (large usage, higher income customers) to install solar panels, consume less kWh, pay for less of the delivery costs, and impose these costs on lower usage and lower income customers. This is the reverse outcome of those opposing the fixed delivery rate design. We are not opposed to distributed generation or any other way for customers to conserve energy and save money. But we feel strongly that signals provided to customers should lead to this end in an efficient and equitable manner. The application of fixed delivery rate design, will result in each customer paying a rate commensurate with the service they receive but not for services received by others.